The real exchange rate (RER) is an economy-wide relative price, closely monitored by governments due to its perceived influence on export competitiveness and growth (a definition of RER and associated concepts are provided in the below annex).

A recent study1 assessing both the direct and indirect poverty impact of the RER on Egypt finds the net effect of RER depreciation/(moderate) undervaluation to be strongly pro-poor (Elbadawi and Refaat, 2015).

Overall, real currency depreciation/undervaluation leads to higher average wages and other non-wage incomes for both poor and non-poor households. Moreover, an RER-led growth strategy is in fact pro-poor because the marginal impact on the income of the poor was found to be higher than that of the non-poor.

However, an RER depreciation/undervaluation exchange rate policy has differing effects on wages across economic sectors and on different types of non-wage income; those negatively affected include those employed in some (but not all) non-tradable sectors or those receiving transfers from social funds.

Therefore, accounting for both the indirect growth as well the direct distributional poverty effects of the RER is highly relevant for policymaking in view of two critical public policy aspects:

It allows evaluating the extent to which such an undervaluation/depreciation strategy is more effective in terms of the poverty reduction goal relative to alternative growth strategies, such as those that favor non-traded activities.

Moreover, by allowing a better understanding of the channels through which RER undervaluation might influence poverty at the household level, the evidence from such research should also inform actionable, sector-specific public policy interventions.